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Natural Gas on the Rise, Will This Rally Last?

January 24, 2012

Natural gas is on the rise and after the sharp fall of natural gas prices in recent weeks, it changed direction yesterday and bounced back. Some attribute to the recent news of Chesapeake Energy to cut by half its production. Today, natural gas prices are still rising.

The recent announcement of Chesapeake Energy, one of the largest U.S. natural gas producers, to cut its gas production by as much as one billion cubic feet per day, is probably among the reasons for the recent sharp change in the direction of natural gas prices to bounce back from their downward trend.

Some may consider this announcement as a signal to other big natural gas producers to limit their production, but it’s very early to make this assumption at this point.

Will this announcement keep natural gas prices rising? I don’t think so, because this production cut isn’t enough to tighten the natural gas market. The late arrival of winter, which might not even come as we are existing January, also helps keep the natural gas market loose.

Consider that between November 2010 and October 2011(over 12 month period), the U.S. market consumed 24,466 billion cubic feet of natural gas, while it produced during the same period 28,176 billion cubic feet. This means there was an excess of 3,710 billion cubic feet; as a comparison, during 2008 the excess supply over demand was 2,359 billion cubic feet. Thus, just to reach similar levels of excess supply (assuming demand unchanged) as in 2008, the production will have to be cut by 1,351 billion cubic feet, which is 3.7 billion cubic feet per day. Thus, if other gas producers will cut their production by at least additional 2 billion cubic feet per day, this may help tighten the natural gas market by the end of 2012.

Finally, don’t forget that the current natural gas storage is at 3,290 billion cubic feet for all lower 48 states, which is 20.8% above the 5-year average, and is 19.6% above the storage levels in 2011. As long as the natural gas storage is high in historic perspective natural gas prices will continue to be low for the season.